Jamaica: Red Stripe Jamaica forced to write down EUR138 mln in assets

Desnoes & Geddes Limited, which trades as Red Stripe Jamaica, wrote down €138 million, or $25 billion, in assets – one of the largest impairments disclosed so far for a local company arising from the COVID-19 pandemic, the Jamaica Gleaner reported on August 19.

“Impact of COVID-19 has been the main tipping point of the impairment in Jamaica, as well as other challenges, including a performance below expectations in prior years,” the company said in response to Financial Gleaner queries.

Before the pandemic, the maker of Red Stripe beer had projected rising sales and returns on its capital. But based on data released by its parent company Heineken International, the Jamaican brewery seems set instead to large reductions in future cash flows from its brands and the lower plant utilisation.

The company still assumes a growth in volumes over the next decade, albeit at a low level of 3.8 per cent between 2020 and 2024, and then 0.7 per cent between 2025 and 2029, according to the Heineken data.

Red Stripe told the Financial Gleaner that its performance remains below normal mainly due to the closure of the hotel sector, one of its distribution channels, during the country’s lockdown. The total domestic rate of decline, however, has since improved, with increased sales momentum, particularly within supermarkets, grocery shops and wholesale stores, the company stated.

The Jamaican economy began reopening on a phased basis in June.

The impairments in Jamaica, Papua New Guinea or PNG, and other emerging markets, totalling €548 million, led the wider Heineken group to post a loss.

“The impairments themselves were in developing markets where the cost of capital tends to be much higher and, therefore, a decline in cash flow in the first few years causes significant drops in the overall value based on discounted future cash flows,” said Heineken CEO and chairman Dolf van den Brink on an investor call to discuss the financials.

Papua New Guinea led with €196 million of impairments, followed by Jamaica with €138 million. Heineken said the two markets operated with weighted average cost of capital of 19.8 per cent and 21.1 per cent, respectively.

Van den Brink said COVID-19 delayed a series of large investments in the natural gas sector in PNG, which would have created a larger consumer base for beer. He did not mention Jamaica specifically, but the local market for beer and alcohol generally is likely to be constrained by the slow return of the tourism sector, as well as the conditional reopening of bars and other entertainment spots.

The tourism sector is an important market for suppliers of goods and services. As an indication of the scope it represents, Jamaica received more than four million tourists in 2019, surpassing its own population of around 2.8 million.

Heineken group reported €11.1 billion in revenue over six months to June 2020, or 18 per cent lower year on year, and a net loss of €297 million.

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